46. Kareem bought a rental house in October 2006 for $250,000, of which $50,000

Question

46. Kareem bought a rental house in October 2006 for $250,000, of which $50,000 is allocated to the land and $200,000 to the building. Early 2008, he had a tennis court built in the backyard at a cost of $5,000. Kareem has deducted $30,900 for depreciation on the house and $1,300 for depreciation on the court. In January 2011, he sells the house and tennis court for $400,000 cash.

a. What is Kareem’s realized gain or loss?
b. If an original mortgage of $75,000 is still outstanding and the buyer assumes the mortgage in addition to the cash payment, what is Kareem’s realized gain or loss?
c. If the buyer takes the property subject to the mortgage, rather than assuming it, what is Kareem’s realized gain or loss?

Explanation / Answer

Total spent by Kareem = 250,000 + 5,000 = $255,000

Depreciation = 30,900 + 1,300 = $32,200

Therefore present value of the house and tennis court = 255,000 - 32,200 = $222,800

a) Kareem's gain = 400,000 - 222,800 = $177,200

b) Kareem's gain ll be the same since the 177,200 + 75000 = 252200

c)Kareem has to pay the mortgage of $75,000. So his net gain =177,200-75000 =$102200

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